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Posts tagged ‘Federal Reserve’

The Fourteen Year Economic Recession

By: James_Quinn

inflation-purchasing-power-of-dollar-since-1871-log-scale

When you ponder the implications of allowing a small group of powerful wealthy unaccountable men to control the currency of a nation over the last one hundred years, you understand why our public education system sucks. You understand why the government created Common Core curriculum teaches children that 3 x 4 = 13, as long as you feel good about your answer. George Carlin was right. The owners of this country (bankers, billionaires, corporate titans, politicians) want more for themselves and less for everyone else. They want an educational system that creates ignorant, obedient, vacuous, obese dullards who question nothing, consume mass quantities of corporate processed fast food, gaze at iGadgets, are easily susceptible to media propaganda and compliant to government regulations and directives. They don’t want highly educated, critical thinking, civil minded, well informed, questioning citizens understanding how badly they have been screwed over the last century. I’m sorry to say, your owners are winning in a landslide.

The government controlled public education system has flourished beyond all expectations of your owners. We’ve become a nation of techno-narcissistic, math challenged, reality TV distracted, welfare entitled, materialistic, gluttonous, indebted consumers of Chinese slave labor produced crap. There are more Americans who know the name of Kanye West and Kim Kardashian’s bastard child (North West) than know the name of our Secretary of State (Ketchup Kerry). Americans can generate a text or tweet with blinding speed but couldn’t give you change from a dollar bill if their life depended upon it. They are whizzes at buying crap on Amazon or Ebay with a credit card, but have never balanced their checkbook or figured out the concept of deferred gratification and saving for the future. While the ignorant masses are worked into a frenzy by the media propaganda machine over gay marriage, diversity, abortion, climate change, and never ending wars on poverty, drugs and terror, our owners use their complete capture of the financial, regulatory, political, judicial and economic systems to pillage the remaining national wealth they haven’t already extracted.

The financial illiteracy of the uneducated lower classes and the willful ignorance of the supposedly highly educated classes has never been more evident than when examining the concept of Federal Reserve created currency debasement – also known as inflation. The insidious central banker created monetary inflation is the cause of all the ills in our warped, deformed, rigged financialized economic system. The outright manipulation and falsity of government reported economic data is designed to obscure the truth and keep the populace unaware of the deception being executed by the owners of this country. They have utilized deceit, falsification, propaganda and outright lies to mislead the public about the true picture of the disastrous financial condition in this country. Since most people are already trapped in the mental state of normalcy bias, it is easy for those in control to reinforce that normalcy bias by manipulating economic data to appear normal and using their media mouthpieces to perpetuate the false storyline of recovery and a return to normalcy.

This is how feckless politicians and government apparatchiks are able to add $2.8 billion per day to the national debt; a central bank owned by Too Big To Trust Wall Street banks has been able to create $3.3 trillion out of thin air and pump it into the veins of its owners; and government controlled agencies report a declining unemployment rate, no inflation and a growing economy, without creating an iota of dissent or skepticism from the public. Americans want to be lied to because it allows them to continue living lives of delusion, where spending more than you make, consuming rather than saving, and believing stock market speculation and home price appreciation will make them rich are viable life strategies. Even though 90% of the population owns virtually no stocks, they are convinced record stock market highs are somehow beneficial to their lives. They actually believe Bernanke/Yellen when they bloviate about the dangers of deflation. Who would want to pay less for gasoline, food, rent, or tuition?

Unless you are beholden to the oligarchs, that sense of stress, discomfort, feeling that all in not well, and disturbing everyday visual observations is part of the cognitive dissonance engulfing the nation. Anyone who opens their eyes and honestly assesses their own financial condition, along with the obvious deterioration of our suburban sprawl retail paradise infrastructure, is confronted with information that is inconsistent with what they hear from their bought off politician leaders, highly compensated Ivy League trained economists, and millionaire talking heads in the corporate legacy media. Most people resolve this inconsistency by ignoring the facts, rejecting the obvious and refusing to use their common sense. To acknowledge the truth would require confronting your own part in this Ponzi debt charade disguised as an economic system. It is easier to believe a big lie than think critically and face up to decades of irrational behavior and reckless conduct…………

full article at source: http://www.marketoracle.co.uk/Article44946.html

QE Worked For The Weimar Germany For A Little While Too

By: LewRockwell

Michael Snyder writes: There is a reason why every fiat currency in the history of the world has eventually failed.  At some point, those issuing fiat currencies always find themselves giving in to the temptation to wildly print more money.  Sometimes, the motivation for doing this is good.  When an economy is really struggling, those that have been entrusted with the management of that economy can easily fall for the lie that things would be better if people just had “more money”.  Today, the Federal Reserve finds itself faced with a scenario that is very similar to what the Weimar Republic was facing nearly 100 years ago.  Like the Weimar Republic, the U.S. economy is also struggling and like the Weimar Republic, the U.S. government is absolutely drowning in debt.  Unfortunately, the Federal Reserve has decided to adopt the same solution that the Weimar Republic chose.

The Federal Reserve is recklessly printing money out of thin air, and in the short-term some positive things have come out of it.  But quantitative easing worked for the Weimar Republic for a little while too.  At first, more money caused economic activity to increase and unemployment was low.  But all of that money printing destroyed faith in German currency and in the German financial system and ultimately Germany experienced an economic meltdown that the world is still talking about today.  This is the path that the Federal Reserve is taking America down, but most Americans have absolutely no idea what is happening.

It is really easy to start printing money, but it is incredibly hard to stop.  Like any addict, the Fed is promising that they can quit at any time, but this month they refused to even start tapering their money printing a little bit.  The behavior of the Fed is so shameful that even CNBC is comparing it to a drug addict at this point…

full article at source: http://www.marketoracle.co.uk/Article42405.html

Growth focus is mending US while austerity stalls Europe

By David Mc Williams

WHOEVER has won the US election, he will be reasonably assured that he will preside over an economy that is on the mend. Last weekend I spoke to someone who knows Obama well and is a big Democratic fundraiser in California. His assessment is that Obama knows that the economy is moving in the right direction but he also knows that the next president will gain credit and this is one of the factors driving him as he would be appalled if Romney took the economic plaudits.

Whether this is a fair assessment of the president’s state of mind, it is significant that the US economy, after a few years on the ropes, is recovering. One way to look at the last four years of economic policy in the US is that a battered, bruised and very sick economy has been nursed back to health by a central bank and a government that is putting growth first and is worrying about austerity later.

To achieve this, the central bank has kept interest rates as close to zero as possible in order to ease the severe deleveraging that has gripped the US since the property/credit bubble burst in 2008/9. In tandem, where low interest rates have not worked because the people have too much debt and the banks too much bad debt, the Federal Reserve has engaged in what is called “quantitative easing”, buying up collateral from the banks and giving the banks money in return………………………………

full article at source: http://www.davidmcwilliams.ie/2012/11/08/growth-focus-is-mending-us-while-austerity-stalls-europe?utm_source=Website+Subscribers&utm_campaign=bbd0819686-08112012&utm_medium=email

Your Liberty and Your Money

By Dan Denning

We begin with a cynical thought experiment. It’s really a conclusion  about what’s going on in the financial markets. And the conclusion  is this: the value of financial assets and currencies is being  deliberately crashed in order to transfer wealth from the public to  a small group of global elites.

Sounds crazy, right? Maybe even cranky? We’ll get to that shortly.  But first…

The typical result of credit booms and busts is to transfer  ownership of real assets and productive businesses from the public  to the insiders. In our thought experiment, the Federal Reserve  exists to make this happen in a way that doesn’t alert the public to  what’s really going on. The insiders — or anyone who knows how these  things work — sell to the public in the mania phase. The panic and  crash phase of a bust is when the public realizes the game is up……………………………….

full article at source: http://dailyreckoning.com/

Occupy The Fed Movement Launched

by

The Occupy Wall Street crowd has become predictably focused on issues like taxing the middle class and moderately “rich,” ending capitalism and even re-electing Obama to ‘fight’ the very elites who pushed him into power. Focus should instead be on the real source of power for the out-of-control bankster class- the private, unaccountable Federal Reserve bank that creates money out of thin air, issues secret loans to insiders and foreign governments and systematically institutes debt on the American people through their undue powers.

With this in mind, Alex Jones is calling on patriots to “occupy” branches of the Federal Reserve, with plans to appear at three locations in Texas this weekend in Dallas, Houston and San Antonio

source : http://www.youtube.com/user/TheAlexJonesChannel

The Federal Reserve Must Implement QE3

Gold prices surged today to a new all time high of $1,463.70 per ounce, while silver prices soared to a new 31-year high of $39.785 per ounce. Silver is now up 129% since NIA declared silver the best investment for the next decade on December 11th, 2009, at $17.40 per ounce. The gold/silver ratio is now down to 37, compared to a gold/silver ratio of 66 when NIA declared silver the best investment for the next decade. This means that not only is silver up 129% in terms of dollars since December 11th, 2009, but silver has also increased in purchasing power by 1.78X in terms of gold.
 
Gold is the world’s most stable asset and the best gauge of inflation. This brand new breakout in the price of gold leads us to believe that the Federal Reserve is getting ready to unleash QE3 at the end of June. The Fed will surely not call it QE3, but NIA can pretty much guarantee that the Fed will continue on with their purchases of U.S. treasuries. If the Fed pauses after QE2, it will mean that treasury bond yields will need to surge to a level where they attract enough private sector and foreign central bank buyers in order to not only support the funding of our rapidly rising budget deficits, but to support the redemption of maturing treasury securities.
 
In the month of March, the U.S. government spent more than eight times its monthly tax receipts, when you include the money spent for maturing U.S. treasuries. The U.S. treasury netted $128.18 billion in tax receipts during the month of March, but paid out a total of $1.05 trillion, which included $49.8 billion in Social Security benefits, $47.4 billion in Medicare benefits, $22.58 billion in Medicaid benefits, and $37.9 billion in defense spending. However, by far, the U.S. paid out the most for maturing U.S. treasuries, which equaled $705.3 billion.
 
In order for the U.S. government to stay afloat with only $128.18 billion in tax receipts, it had to spend $72.5 billion from its balance of cash, which ended the month at $118.1 billion, and sell $18 billion worth of TARP assets. But most importantly, the U.S. treasury had to sell $786.5 billion in new treasury bonds.
 
The U.S. government is the largest ponzi scheme in world history. We can only fund our government expenditures and pay off maturing debt plus interest, by issuing larger amounts of new debt. Americans are lucky that we have been blessed with record low interest rates for an unprecedented amount of time, but NIA believes that as we roll over U.S. treasuries in the future, we will have to refinance them at much higher interest rates. Our national debt is now so large that interest payments on our debt will become the government’s largest monthly expenditure.
 
If the Federal Reserve doesn’t implement QE3, NIA believes it will just about guarantee a bursting of the U.S. bond bubble in the second half of 2011. If the Fed stops buying U.S. treasuries, there is a chance that we won’t find foreign buyers for our bonds no matter how high interest rates rise. The world is waking up to the fact that the U.S. government is insolvent, and the benefits of propping up the U.S. dollar are no longer worth the expense to our foreign creditors. The U.S. government ponzi scheme will soon be exposed for the world to see.

 
Japan has been the most consistent buyer of U.S. treasuries. With Japan needing to raise $300 billion to rebuild parts of their country that were destroyed by the earthquake, tsunami, and nuclear disaster, we believe they will be forced to dump their U.S. treasuries, at a time when the U.S. desperately needs Japan to roll over their treasuries into larger amounts of new ones. Not only that, but with Arab revolutions taking place across major Saudi states and the U.S. beginning to occupy Libya for no reason at all, we will likely see Gulf states follow in Japan’s footsteps and stop purchasing/dump U.S. treasuries. Plus, China appears to be becoming more reluctant to continue buying U.S. treasuries, and is positioning the yuan to be the world’s new reserve currency. Without Japan, Saudi states, and China, there will be no buyers left for U.S. government bonds.
 
The fact is, with no QE3, we could literally see the 10-year bond yield double from 3.52% to north of 7%, overnight. Even then, it is unlikely to attract foreign buyers and we will likely be faced with failing bond auctions, which would cause a massive rush out of the U.S. dollar and trigger the currency crisis NIA has been predicting. NIA sees no other option for the Fed, but for it to continue on with its endless money printing and destructive inflationary policies.
 
Federal Reserve officials discussed last month in closed-door meetings the possibility that rising commodity prices could cause inflation. The fact is, rising commodity prices don’t cause inflation, they are a symptom of inflation. When the Fed leaves interest rates at 0% for over two years and prints $600 billion as part of QE2, that money printing and easy money is the inflation of our money supply, and rising prices are the result.
 
The Fed is narrow-minded and continues to focus on the CPI, which only grew last month by 2.11% year-over-year. Fed Chairman Ben Bernanke says he expects rising commodity prices to create a “transitory” boost in U.S. inflation. Meaning, when the CPI rises even higher in the upcoming months, Bernanke will likely place the blame on what he considers to be temporarily high oil and soft commodity prices.
 
The CEO of Wal-Mart is now saying that U.S. inflation is “going to be very serious” and that Wal-Mart is already seeing “cost increases starting to come through at a pretty rapid rate.” He predicts that because of huge increases in raw material costs, along with soaring labor costs in China, and skyrocketing fuel costs around the world, retail prices will start increasing at Wal-Mart and all of their competitors in June, especially for clothing and food.
 
When asked about the predictions of Wal-Mart’s CEO, Bernanke said that he expects price pressures to remain largely stable, but then added, “Wal-Mart has more data than the government does.” Bernanke was also quoted as saying, “We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability.”
 
The European Central Bank (ECB) is expected to raise interest rates tomorrow for the first time since 2008. Many people are now speculating that the Federal Reserve will begin raising the Federal Funds Rate at the end of 2011. NIA is receiving many new ‘NIAnswers’ and email questions on a daily basis, asking us what will happen to gold and silver prices if the Federal Reserve were to raise interest rates.
 
In our opinion, the Federal Reserve raising the Fed Funds Rate would actually be very bullish for gold and silver prices, because it will serve as an admission that even the Fed believes inflation is becoming a major problem and beginning to spiral out of control. Historically, the best performing time period for precious metals has been when the Fed begins to raise artificially low rates. Remember, when the Fed begins to raise rates, they will probably raise rates only 1/4 or possibly 1/2 of a percentage point at a time. Interest rates of 1% or 2%, although higher than 0%, are still artificially low and will do nothing to curtail inflation. NIA believes the real rate of U.S. price inflation is now 6% and we will need to see the Fed Funds Rate rise to a level that is higher than the real rate of price inflation, if the Fed wants to have any hope of preventing hyperinflation.

source:http://inflation.us/

There Is No Business Like Bond Business

 

Front-Running the Fed in the Treasury Market, There Is No Business Like Bond Business

Interest-Rates / US Bonds Jan 19, 2011 – 04:17 AM

By: Professor_Emeritus

 

For some nine years I have been predicting that the economy is going to a recession morphing into a depression, using a purely theoretical argument. The essence of my argument is that the open market operations of the Fed cause a protracted decline in interest rates which is responsible for the hard-to-detect capital destruction affecting the financial sector no less than the productive sector. The immediate cause of the depression is the destruction of capital. The ultimate cause is the monetary policy of open market operations. The chain of causation is as follows.

  1. Open market operations (in effect, net purchases of T-bills) by the Fed are predictable. They invite bond speculators to take risk-free profits offered by this fact of predictability.
  2. Bond speculators buy the long-dated Treasurys and sell the short-dated ones, to pocket the difference in yields. These straddles represent borrowing short and lending long. As such, they are inherently risky. However, Quantitative Easing takes the risk out by making the odds, that the normal yield curve will invert, negligible.
  3. The bond speculator faces the problem of having to roll forward the fast-expiring short leg of his straddle by selling T-bills. The extraordinary funding and refunding requirements the Treasury is facing, and the extraordinary pressure on the Fed to increase the money supply combine to make it ultra-easy for the bond speculator to move both the short and the long leg of his straddles as he sees fit.
  4. The upshot is that interest rates keep falling along the entire yield curve. Regardless how many long-dated issues the Treasury offers, bond speculators snap them up even before the ink is dry on them.

Here we have the solution to the Greenspan-conundrum: the sky is the limit to the bond speculators’ appetite for Treasury paper. They are all right as long as they can sell T-bills against them. But as the sky is the limit to the Fed’s appetite for T-bills, both flanks of the speculators are secure.

In my other writings I have explained how a prolonged fall in interest rates along the yield curve brings about depression through the indiscriminate destruction of capital in the productive as well as financial sector.

There is a vicious spiral: the more currency the Fed creates, the more risk-free profits bond speculators will reap, contributing to a further fall of interest rates.

This outcome is the exact opposite of the one predicted by monetarism. The latter predicts that the new money created by the Fed will flow to the commodity market bidding up prices there, to nip depression in the bud. Bernanke & Co. fully expects this to happen. This is not what is happening, however. The new money refuses to flow uphill to the commodity market. It flows downhill to the bond market where the fun is. Why take risks in the commodity market, the speculators ask, when you can gamble risk free in the bond market? So grab the money, buy more bonds and sell an equal amount of bills. As a consequence of bullish bond speculation interest rates fall, prices fall, employment falls, firms fall. The squeeze is on, bankrupting the entire economy.

Official check-kiting

Some might object that the Fed could short-circuit the process and undercut the bond speculators’ lucrative business. All it has to do is to buy the short-dated paper directly from the Treasury. Inverting the yield curve will shake off the parasites. My answer is that there is no danger of this happening. The Treasury and the Fed know that bond-vigilantes watch what they are doing like a hawk. Any hanky-panky of direct sales of T-bills by the Treasury to the Fed would make them cry “foul play!” As indeed it would be: direct sale of Treasury paper to the Fed would degrade the dollar from irredeemable currency to fiat currency. There is a subtle difference, realized only by the few.

Fiat currency is worse. Its arbitrary augmenting is decided behind closed doors. It does not need the endorsement of the open market. Fiat currencies have a short life-span as they readily succumb to the sudden-death syndrome. Irredeemable currencies are different from fiat in that they are created openly, using collateral purchased in the open market. They have a more respectable life-span. As long as the official check-kiting conspiracy between the Treasury and the Fed remains hidden from the general public, irredeemable currency may even prosper. Direct sale of T-bills by the Treasury to the Fed would tear down the curtain that hides the fact of check-kiting.

The mechanism of check-kiting is as follows. The Treasury issues debt which it has neither the intention nor the means ever to repay. This debt is used as “backing” for Federal Reserve notes and deposits, which the Fed has neither the intention nor the means ever to redeem. When the Treasury debt matures, it is paid in Federal Reserve credit issued on the collateral security of new Treasury debt. When Federal Reserve credit is presented for redemption, the Fed offers interest-bearing Treasury debt in exchange. This is a shell game and it exhausts the definition of check-kiting. Neither the Treasury debt, nor the Federal Reserve credit is issued in good faith. Neither is redeemable any more than Charles Ponzi‘s tickets were. They are both issued in order to mesmerize a gullible public, much the same way as Ponzi did.

Treasury and Fed officials know their history. They are familiar with the fate of the assignat, the mandat, the Reichsmark, not to mention the Continental. They know that no fiat money ever survived “the slings and arrows of an outrageous fortune”. Their only hope is that the fate of the irredeemable dollar, as predicted by Friedman, would be different. They would not embark upon an adventure in monetary policy involving direct sales of T-bills by the Treasury to the Fed. If they did, surely this would be the end of their experiment. Foreigners as well as Americans would start dumping the dollar unceremoniously, and buy anything they can lay their hands on. This is variously known as flight into real goods, Flucht in die Sachwerte, crack-up boom, Katastrophenhausse. I purposely avoid using the term hyperinflation as it connotes with the Quantity Theory of Money, which is not really a theory. It is a linear model trying to explain non-linear phenomena.

Falsecarding by the Fed

There is also a second method by means of which bond speculators are making risk-free profits. They “front-run” the Fed in the bill market. This means that, through inside information or otherwise, they divine when the Fed has to answer “nature’s call” and must make the next trip to the open market in order to buy the collateral without which it cannot issue more money.

Bond speculators forestall the Fed by purchasing the bills beforehand, thus driving up the price. Then they turn around and dump the paper into the lap of the Fed at the enhanced price, making a risk-free profit. This process is called “scalping”, after the kindred activities of small-time speculators in tickets for the World Series and other popular sporting events.

The objection that the Fed knows how to throw bond speculators off scent by various stratagems for example, through falsecarding, say, by selling when speculators would expect it to buy can be safely dismissed. There is no question that every year the Fed is a big buyer of bills on a net basis. If it sells, it has to buy that much more later on. Fiddling means that the Fed may miss its target. Falsecarding may backfire.

The speculators are a smart lot, thanks to “natural selection” culling the rank and file. They risk their own capital, which they stand to lose if they place the wrong bet. Once their capital is gone they are out, and smarter guys will take over. Hired hands at the Fed are no match for them as far as brightness and adroitness is concerned. The latter work for salaries. If they make the wrong bet, losses will be replenished by dipping into the public purse. Think of the losses the Bank of England suffered at the hand of a lonely bond speculator, one George Soros. The British public was forced to swallow the loss, and Soros was allowed to run with the loot and boast in his book that he has busted the Bank of England single-handedly. Recently Soros said in Davos that he is bearish on gold. In his opinion gold is in a bubble. Of course. He knows that he couldn’t bust the Bank of England again, once it is back on the gold standard!

Cheating in Las Vegas

My voice has remained a cry in the wilderness. Nobody paid attention to the mumblings of this armchair economist.

My idle theorizing got an unexpected boost from the website Jesse’s Café Américain (http://jessescrossroadscafe.blogspot.com). On January 22, 2010, Jesse posted a story with the title Front-Running the Fed in the Treasury Market from which the following quotation is taken.

Attached is some information from a reader. I cannot assess its validity, not being in the bond trading business. But it does sound like someone has tapped into the Fed’s buying plans to monetize the public debt and is front-running those purchases, essentially ‘stealing’ money from the public. It’s what they call a ‘sure thing’. To try and figure out who might be doing it, I would look for some big player who is showing extraordinary returns on their trading, with consistent profit that is not statistically ‘normal’, but is consistently ‘too good’. The problem with cheaters is that they sometimes get greedy and call attention to themselves. In Las Vegas the bigger cheats at the casino were often taken to the desert for further questioning and final disposal. On Wall Street they are more arrogant and persistent, defying resolution with that ultimate defiance, “We’ll just have to figure out other ways to cheat, and come back again”.

Time for a trip to the desert?

Here are my reader’s observations from the bond market.

“I used to work for a BB on a prop desk until the financial crisis took hold and they fired the less senior guys. I now trade US Treasurys for a small prop firm in xxxxx, to scalp basis trades in most on-the-run securities. Occasionally, I will also take position in the repo markets for off-the-runs if I see something ‘mispriced’. Your recent article piqued my interest because we, too, have noticed ‘shenanigans’ of a sort in the Quantitative Easing program involving US Treasurys.

“What we have noticed, especially in smaller issues like the 7 Year Cash, is that before a Fed buy-back would be announced, the price would pop significantly as if buyers would run through all the offers on the two major electronic exchanges (BGC Espeed and ICAP Broker Tec). This has occurred more than several times as the 7 Year Cash would be overvalued both by its BNOC, by as much as 20-30 ticks, as well as by its value relative to similar off-the-runs. These buyers would lift every offer they could, driving the price substantially above its ‘value’, sometimes for as long as a week at a time. After this buying occurred, the Fed would announce the purchase of that security, sometimes a handle above its approximate value. This ‘luck’ has occurred not just in the on-the-run 7 Year sector, but also in the 30 Year Cash, 3 Year Cash, and in several other off-the-runs. Again, it was especially prevalent in the less liquid Treasury products. Often the ‘appetite’ for these securities would begin two weeks before the official Fed announcement. The buying was well-orchestrated and done in such a way as to throw it out of kilter with the like cash Treasurys and the CME Ten Year Contract. If you examine the charts of some of the selected buy-backs before the official announcement, you will see a similar occurrence.

“While I haven’t broken this down into a paper to prove it (and I see nothing positive coming out of contacting the ESS-EEE-SFE about this issue), I can assure you that it was occurring on a consistent basis across the entire curve. A certain issue would be bid up substantially above market value (as determined by several metrics), only to be gobbled up later by the Fed at an unreasonably high price. These players must have substantial pockets as we, the small guys (but with a decent capital base) would take the other side of what seemed to be an obvious fade. While this did not occur in every issue of the Quantitative Easing program, it occurred often enough to be obvious to any knowledgeable observer.

While I am not sure that this can be attributed to a purposeful Fed policy or someone at the Fed talking to his pals, I am certain that it transpired.”

Congenital disease of the monetary system

The anonymous correspondent of Jesse is looking for an answer in the wrong direction. Cheating is not necessarily involved. What he has observed need not be a purposeful, if veiled, Fed policy, nor is it necessarily someone at the Fed tipping off his brother-in-law at a brokerage house (however valuable the tip may be).

What we face here is a congenital disease of the irredeemable dollar. Open-market operations is the tool for the purpose of increasing the money supply through monetizing government debt as needed. It should be recalled that open-market operations by the Fed were illegal according to the Federal Reserve Act of 1913. The original Act looked at the monetization of government debt as an anathema. Illegal open-market operations started in the early 1920’s. They were legalized ex post facto in 1935 by an amendment to the Act, after the gold standard was destroyed by the proclamation of president Roosevelt in 1933. Those who sponsored the amendment were ignorant of what effect open market operations would have on bond speculation. Economists in and out of government and academia were equally ignorant. The financial press also failed to criticize the hare-brained scheme of open market operations making, as it did, profits from bond speculation risk free.

There is no need to look for a conspiracy in the bond market. It is quite possible that a large number of smart speculators, acting spontaneously and independently of one another, have come to realize that there is a bonanza, perfectly legal, in ripping off the public purse. Of course, they kept their own counsel.

If anybody is responsible for this colossal blunder of economics releasing the genie of risk-free speculation out of the bottle, the names that come to mind are those of Keynes and Friedman, resp. They invented, resp., ‘improved’, the system of floating exchange rates assuming a goldless currency that has to be arbitrarily augmented from time-to-time through the monetization of government debt (that, incidentally, proliferated profusely after the politicians deliberately unbalanced the budget upon the explicit advice of Keynes). The rest, as they say, is history.

As long as budget deficits were ‘modest’, the activity of speculators making risk-free profits in the bond market escaped public attention. With the advent of ‘Quantitative Easing’ and mega-deficits, everybody sitting at a bond-trading desk can see it. The figures literally jump off the screen, as explained by Jesse’s blog.

Recruiting a corps of shills

To be fair to Jesse’s anonymous correspondent I must admit that his conjecture, that in risk-free bond speculation we may be looking at deliberate Fed policy, is plausible. It is not impossible that the rot in the U.S. monetary system has already spread so far that in a truly free and unrigged bond market no bidders would turn up. Time is long since past when Treasurys were eagerly sought after by the most conservative segment of the investing public, such as guardians of widows and orphans, trust funds, eleemosynary institutions. Typically, they held the bonds to maturity. Treasurys, second only to gold, were the most trusted instruments of wealth-preservation.

Under the regime of the irredeemable dollar no investor in his right mind would buy a Treasury bond and hold it till maturity. Treasurys lose value as ice melts in the sunshine. They have become a plaything in the hands of speculators for their value in turning a fast buck. Under the gold standard there was no bond speculation, just as there was no foreign exchange speculation. Interest rates were stable and so were bond prices. Speculators would shun bonds. Of course, all this changed when president Nixon defaulted on the short-term gold obligation of the Treasury to foreigners in 1971, and gold was finally removed from the international monetary system at the behest of the U.S. government.

For a decade speculators were happy with the trading profits they could make in the bond market. But as the monetary system kept deteriorating, they started abandoning bonds, transferring their activities to the commodity market. By 1981 demand for bonds practically evaporated. As this spelled the end of the regime of the irredeemable dollar, the Fed had to do something to prop up the bond market by enticing bond speculators back.

Thus, then, it is quite possible that a decision was made at the highest level to offer the enticement of risk-free profits to bond speculators. It certainly cannot be denied that bond speculators have been making obscene profits in the course of the 30-year bull market in bonds that is still ongoing. These profits are unprecedented in the history of speculation, both on account of their magnitude and their regularity. They were made at the expense of productive enterprise, the capital of which has been surreptitiously siphoned off by the falling interest-rate structure.

Another way of describing this scenario (assuming it is correct) is that in 1981 the Fed, unknown to the public, decided to recruit a corps of shills to prop up a moribund bond market. The shills hired by the casinos of Las Vegas bet big and win big at the gaming tables in full view of the gamblers who are unaware that they are being treated to a show. The sight of these big payoffs will then perk up the gambling spirit of a lethargic clientele.

The shills recruited by the Fed are the bond speculators, and their remuneration is in the form of risk-free profits they are allowed to make (and keep). The scheme was a roaring success. Not only did it save the bond market from extinction; it also saved the dollar from ignominy, and was instrumental in making possible a whole string of bubbles, each bigger than the previous one.

The Road to Hell Is Paved with Good Intentions

The problem is far more serious than it may at first appear. Risk-free speculation is like a computer-virus that has no antidote and threatens to wipe out the Internet. It short-circuits normal economic processes and gobbles up the world economy.

I would welcome a public debate of my thesis that risk-free bond speculation suppresses the rate of interest and destroys capital in the process. I have challenged neo-classical economists who still consider the open-market operations of the Fed as a ‘refined tool to manage the national economy’. I want them, instead, to see in open-market operations the cancer of the economy responsible for the withering of the world’s prosperity. So far my challenge has fallen upon deaf ears.

Here is the problem. The prevailing orthodoxy is the unholy alliance between Keynesianism and monetarism inspired by Friedman (defying the pretence that these two are antagonistic theories). The idea that an artificial increase in the money supply must raise commodity prices dies hard. But as my theory suggests, and as events have repeatedly shown (first during the Great Depression of the 1930’s, and again, during the present crisis), the presence of risk-free speculation renders the increase in the money supply counter-productive. It causes prices to fall rather than rise.

Giving them the toy of risk-free profits makes speculators vacate the commodity market where risks are too high. They will then congregate in the bond market where risks are non-existent. The speculator who in the absence of risk-free profits might resist falling prices in the commodity market, will decline the honor of pushing the Keynesian agenda if given the choice of risk-free profits in bonds. This is basic human reaction that cannot be criticized, still less rectified, by official brow-beating. Keynesians should have thought about the consequences of their master-plan more thoroughly before they put open-market operations into effect.

The intentions of policy-makers at the Fed are praiseworthy. They want to prevent prices and employment from collapsing. But they are prisoners of their orthodoxy, and their good intentions make them steer the economy to the road to hell. A catastrophe is confronting the Titanic, but the captain, just confirmed in his position in spite of a most serious public challenge, will not change his course.

A head-on collision with the iceberg straight ahead, otherwise known as the debt-tower, now appears inevitable.

Calendar of Events

Seminar at the Martineum Academy, Szombathely, Hungary, March 25-29, 2010

Is the Global Financial Crisis Over?

Sponsored by the Gold Standard Institute, with the participation of Sandeep Jaitly, Peter van Coppenolle, Rudy Fritsch, Darryl Schoon, Nathan Narusis, Professor Fekete, and others. Among other topics, there will be a presentation of the latest research on the gold basis, the world’s pension woes, and an exclusive business ideaturning the ridiculously undervalued “legal tender gold coins” to your advantage. For further details, see: www.professorfekete.com

By Professor Antal E. Fekete,
Intermountain Institute for Science and Applied Mathematics

“GOLD STANDARD UNIVERSITY” – Antal E. Fekete aefekete@iisam.com

For further information please check www.professorfekete.com or inquire at GSUL@t-online.hu .

We are pleased to announce that a new website www.professorfekete.com is now available. It contains e-books, archives, news about GSUL, and material of current interest

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